Geo-Political Tectonics

The recent earthquake in Taiwan is a reminder that the Earth’s tectonic plates are continually shifting.

However, as earth plates shift, so do political landscapes. The US appears to be strategically re-positioning itself, in the face of the potential threat to Taiwan from China. This is being reflected in both a shift in its military spending and alliances within the Pacific, but also ambitions to increase its semiconductor chip manufacturing capability and lessen exposure to Taiwan.

Currently, Taiwan manufactures around 65% of the world’s semiconductors. Taiwan Semiconductor Manufacturing (TSMC) recently announced it is to build a third semiconductor factory in Arizona, taking its total investment in the US to $65bn. TSMC has begun to diversify production, under pressure from customers and governments concerned about supply security given the threat to Taiwan from China.

Meanwhile, President Joe Biden has warned China about its increasingly aggressive activity in the South China Sea and has reaffirmed the US commitment to the US-Philippines Mutual Defence Treaty. One US official said ‘China is underestimating the potential for escalation.’ The US is also pushing for Japan to be involved in the AUKUS security pact between the US, UK, and Australia. AUKUS Pillar I, will focus on Australia’s procurement of nuclear-powered submarines. AUKUS Pillar II, will involve collaboration on technologies such as undersea capabilities and hypersonic missiles. It is hoped Japan becomes the first additional Pillar II partner.

Faced with some domestic challenges and growing international tensions, Is China strategically shifting its economic and political influence? Significantly, China has been a net seller of US Treasuries and its holding is now down to an estimated $800bn from a peak of $1.2trillion in 2016. Meanwhile, the People’s Bank of China has been a significant buyer of gold. Perhaps Beijing has learned a lesson from the war in Ukraine and sanctions on Russian assets held in western banks and is reducing its exposure to the US? Meanwhile, China has continued to ‘strengthen strategic co-operation with Russia’ and US intelligence claims it is providing military support for the war in Ukraine, despite positioning itself as neutral.

China seems set on keeping Taiwan in the political spotlight. One thing is clear and that is that the US and China both appear to be taking precautionary measures, preparing for the worst-case scenario.

What have we been watching?

Jamie Dimon, Chief Executive of JPMorgan Chase, the largest US investment bank warned of the risk of ‘stickier inflation and higher interest rates than markets expect.’ He said the US economy is being fuelled by large amounts of government deficit spending and past stimulus. The transition to a greener economy, restructuring of global supply chains and increases in defence spending and healthcare were all driving expenditure.

Markets have been adjusting to a slower pace of interest rate cuts but this has drifted further to the right following another hotter than expected set of inflation data. This was the third consecutive month that core inflation has outstripped market expectations. Market futures had started the year pricing in six interest rate cuts in 2024, but this has now come down to as few as two cuts, with the first now likely in September rather than June. Assuming two cuts of 0.25% later in 2024, then this would leave the Federal Reserve target rate at 4.75%-5% by the end of the year. The yield on 10-year US Treasury stock climbed to 4.5%. Meanwhile, the European Central Bank (ECB) still looks on course to announce its first interest rate cut in June. Could the Bank of England also cut interest rates before the Fed? Sterling dipped to just over $1.25.

Chinese Foreign Minister Wang Yi proposed a conference that recognises the equal participation of Russia and Ukraine at which peace proposals can be discussed on an equal footing. Wang expressed his views during a meeting with his Russian counterpart Sergei Lavrov.

Iran launched its first-ever direct attack on Israel on Saturday, firing more than 300 drones and missiles toward the country, with 99% repelled by an allied force comprising the US, UK, France, and Jordan. President Biden affirmed that the US would not participate in any Israeli counter-offensive against Iran and advised Netanyahu to ‘take the win’.

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In the UK, retail sales improved in March, helped by Easter. Retail sales were up by 3.5% on the same month last year and above the three-month average of 2.1% with food sales up by 6.8%. The latest RICS survey for March is also pointing to a gradual improvement continuing in the housing market.

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The European Central Bank (ECB) left its deposit rate unchanged at 4% as expected. More important, was the ECB press conference and while it would not pre-commit to an interest rate path, it did say that it would be ‘appropriate to reduce the current level of monetary policy restriction’ if incoming data increases the bank’s confidence that inflation has been tamed. An interest rate cut in June looks very likely.

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In the US, inflation in March came in ahead of expectation at 3.5% due to price pressures in service sectors such as healthcare and car insurance. Core inflation was also higher than expected at 3.8%. The Producer price Index (PPI) was lower than expected in March at 2.1% but was up on February’s 1.6%.

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China’s property sector woes appear never ending. Property developer Shimao Group has been hit by a winding-up petition from state-owned China Construction Bank after it failed to repay loans of £160m. Deflationary concerns also re-surfaced following the latest inflation data which showed headline CPI rose by 0.1% in March, down from 0.7% the previous month. Meanwhile, credit rating agency Fitch, while reaffirming China’s sovereign credit rating as ‘A+’, did however downgrade its outlook to negative as it believes the country’s state deficit will rise to 7.1%.

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Brent oil moved up to $90 as Israel said it had set a date for an offensive in Rafah and fears grew of a retaliatory attack by Iran.

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Finally, following the success of the London Abba Voyage avatar live music show, Pophouse, the Swedish entertainment company founded by Abba’s Bjorn Ulvaeus, has bought the music and image rights to US rock band Kiss for $300m. Meanwhile, Taylor Swift’s Era Tour is the first global tour to exceed $1bn. Live music entertainment has re-bounded very healthily from the global pandemic. Given the sums involved, will older music artists be tempted to explore the avatar concert option?

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Read Last Week’s Alpha Bites – Dangerous Liaisons

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.